IRS Stays Away from Churches

Do you know the difference between a non-profit religious organization and a church?  Perhaps the biggest difference is their tax obligations.  While it is true that neither  is required to pay taxes, a pastor, televangelist, or broadcasting company that is registered as a religious organization must file information returns (Form 990) with the IRS that disclose how their money is spent.  However, churches, for the most part, do not have to answer to anyone.

John Burnett, reporting for National Public Radio, writes about a Christian television network called “Daystar” that operates much like a wealthy corporation, except without the transparency.  Yet they call themselves a church and the IRS has never questioned it so far as anyone knows.  There is a 14-point test that the IRS may use (in theory) to determine if an entity qualifies as a church under the law, but the IRS doesn’t enforce it. And if these churchy executives decide they want to drive Bentleys and live in sprawling chateus, they do it.  If they want to spend donation money on their own pet causes, then they do it.  According to IRS insiders, the government just doesn’t audit churches anymore, for at least the past five years anyway.

As part of America’s commitment to religious freedom, anyone can start a church, start preaching and passing the collection plate. They are presumed to be a church by the IRS — no questions asked.

Quoting former Daystar employees and tax attorneys, Burnett makes it pretty clear that Daystar would never meet the criteria for church status if the IRS were to enforce its own rules.  We all know how good the IRS is about enforcing its own rules…

Veterans Groups Resist IRS Audits

The IRS does a fairly good job taking care of American military families, but what about our veterans?

Some think the IRS is picking on the American Legion and other non-profit veteran organizations.  The American Legion is a veterans organization that was incorporated by Congress in 1919.  They are “the nation’s largest wartime veterans service organization, committed to mentoring youth and sponsorship of wholesome programs in our communities, advocating patriotism and honor, promoting strong national security, and continued devotion to our fellow servicemembers and veterans.”  They are also highly enthusiastic about baseball and that’s good enough for me.

Jerry Moran, a Senator from Kansas, is unhappy about audits that the IRS has undertaken of certain American Legion posts.  Apparently the IRS requires that they maintain dates of service and character of service records for all its members or face $1,000 per day penalties.  American Legion officials are claiming that they have never heard of this requirement.

Really this requirement is not unreasonable, given the fact that it is the IRS’ job to make sure all tax-exempt organizations are meeting the requirements for tax-exempt status.  But veteran groups are claiming that they have never been informed of the record-keeping obligations.  Moran wants to know when this requirement came about, under whose watch, and by what authority.  These are valid questions since the audits are being conducted pursuant to mere IRS “guidelines” found in the Internal Revenue Manual.  Moran is asking the IRS to point to the actual legal authority that grants them the right to conduct these audits and levy tax penalties for non-compliance.

Accounting Today asked about these audits.  The IRS’ response:

  • There is no special enforcement effort underway; just routine compliance activity
  • Authority for these audits is granted by Internal Revenue Code Section 501(c)(19)
  • The IRS HAS made efforts to inform veteran organizations of their obligations by way of outreach programs and special publications, so if they didn’t know, they should have known

IRS Records Prove AROD is a Bad Guy in Boston

According to a recent Boston Globe review of Internal Revenue Service (IRS) filings New York Yankee Alex Rodriguez is a bad guy. A Boston news source depicting a Yankee as a bad guy is hardly surprising. What interests me, as a tax attorney, is that the basis for hatred for Rodriguez this time is not baseball related; it is based on IRS records. According to the Boston Globe, nonprofit organizations are generally expected to donate 65 to 75 percent of their revenues to their designated charitable causes. The remainder of their revenues are supposed to be used to pay their necessary expenses and reasonable salaries of nonprofit employees. This was not the case for Rodriguez’s non-profit organization, according to the Globe.

In 2006, Rodriguez hosted a charity poker tournament that helped the A-Rod Family Foundation raise $403,862 for charity. How nice! However, according to IRS reports, barely 1 percent of the money raised were actually paid to charity. Specifically, only $5,000 was paid to Jay-Z’s Shawn Carter Scholarship Fund and only $90 was paid to a Little League baseball team in Miami; how charitable. The not for profit organization subsequently stopped submitting financial reports to the IRS, and was then stripped of its tax-exempt status. Again, AROD is a bad guy … no shocker … just surprised the revelation was tax based.

Sunday's Political Sermons Will Likely Go Unchallenged

As part of the growing movement called “Pulpit Freedom Sunday,” approximately 1,400 pastors, preachers, and evangelists across the country will address their congregations this Sunday and talk very candidly about which presidential candidate they endorse.  This is something that could theoretically result in revocation of their churches’ tax-exempt status.  Theoretically.

The religious leaders who participate in “Pulpit Freedom Sunday” on October 7th are hoping the IRS will strike back . . . or at least do something.  They really would like to see a lawsuit, which they see as a necessary step in eventually putting the controversy to rest.  But they won’t need their tax attorney standing by because chances are the IRS will not have any kind of response at all.

The IRS simply does not have the manpower to police these sorts of violations.  Yes, the IRS has their hands full with collections and tax relief cases, but that’s not the problem.  The personnel who used to be responsible for investigating churches no longer have the authority to do so.  New regulations have been pending since 2009, but until they are approved, the IRS is absolutely powerless.

Back Again: Pulpit Freedom Sunday 2012

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Hundreds of defiant pastors will be joining forces next month for “Pulpit Freedom Sunday,” an event intended as a “head-on constitutional challenge” to the rules prohibiting churches from endorsing or opposing political candidates.  Participation has grown every year since 2008 when the movement began.  Pastors participating in this October 7th event will be speaking unequivocally for and/or against specific presidential candidates, risking revocation of their 501(c)(3) tax-exempt status.  A risk they welcome, apparently.  They will be recording each sermon and sending it in a care package to the IRS.  They are hoping the IRS takes action against one or all of the pastors so they can then litigate and (eventually) take it all the way up to the Supreme Court.

I’m not sure churches will have a leg to stand on in challenging the constitutionality of this 58-year-old tax code provision.  It would be one thing if the federal government were unilaterally restricting what church representatives can and cannot say over the pulpit, but what about the tax relief offered to non-profit organizations!?  Its a dual tax subsidy for churches: (1) their income is not taxed, and (2) donations to them are tax-deductible.

Sounds like a fun event though — a real American kind of thing to do.  Constitutional law lawyer, tax lawyer,  and interested citizen alike will be watching to see how the IRS responds.

"Americans United" Asks IRS to Investigate El Paso Church

Americans United (AU) is a watchdog group based in Washington D.C. that seeks to protect religious freedoms and educate the American people about the separation of church and state.  Yesterday AU (under the direction of its tax attorneys no doubt) wrote to the Internal Revenue Service — specifically the Director of the Exempt Organizations Division — asking for an investigation of a Catholic Church in Del Paso, TX.  AU claims that the St. Raphael Catholic Church violated the restrictions of Revenue Code section 501(c)(3) that prohibits exempt organizations from “directly or indirectly participating in, or intervening in, any political campaign on behalf of (or in opposition to) any candidate for elective public office.”  The IRS has authority to revoke an organization’s tax exempt status, forcing them to find tax relief outside the parameters of 501(c)(3).  See the full letter here.

The alleged violation took the form of a printed church bulletin, and this is what was written:

I am asking all of you to go to the polls and be united in replacing our present president with a president that will respect the Catholic Church in this country.  Please pass this on to all of your Catholic friends.

I find it odd that whoever was responsible for including this language in the bulletin appears to have been at least somewhat up to speed on the applicable law.  I say that because the message seems purposely vague, in that it does not come out and name any names.  It appears that an attempt is being made to imply a vote for Romney without coming out and saying it directly. 

However, as we know, the law also prohibits any communications or activities that have the effect of supporting or opposing a political candidate.  Whether this is a message directly opposing Obama or indirectly supporting Romney, it doesn’t matter.  Either one would be a violation.

This church is going to have an uphill battle with this tax problem, assuming it even has a leg to stand on.  I believe the fatal error was that the statement appeared in print because (1) there is physical evidence of the violation, and (2) there is little doubt that the statement was made in some kind of official capacity on behalf of the church.

Churches: Avoid Mentioning Romney or Obama

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It is common for some churches and religious leaders to integrate current events and circumstances into their sermons.  Currently the hottest topics around the nation happen to be political, as the Republicans and Democrats work around the clock to impress voters.  However, if they care to avoid tax problems, churches have to be very careful not to come out in support of one candidate over another.  Out of an abundance of caution, churches (and those who speak on their behalf) should not mention specific candidates this election year.  In fact, they should do little more than encourage their congregations to vote, and maybe provide non-partisan voter education information.

Under the Internal Revenue Code, all section 501(c)(3) organizations are absolutely prohibited from directly or indirectly participating in, or intervening in, any political campaign on behalf of (or in opposition to) any candidate for elective public office. Contributions to political campaign funds or public statements of position (verbal or written) made on behalf of the organization in favor of or in opposition to any candidate for public office clearly violate the prohibition against political campaign activity.  Violating this prohibition may result in denial or revocation of tax-exempt status and the imposition of certain excise taxes.


Ordinary people are going to talk about politics at church; this is not the kind of activity that is prohibited by 501(c)(3).  But if you hear anything (or read anything) coming from those with authority to speak for your church that favors one candidate over another, or has the effect of favoring one of the candidates, you can be sure that this is a violation of the Internal Revenue Code.  Consult a tax attorney for more information.


Ivy League Audits

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In this down economy the IRS is doing all it can to improve collection results, which is why it is targeting wealthy individuals, banks, corporations, . . . even universities.

Top Ivy League colleges are in the IRS crosshairs because they raise a lot of money, and not just in tuition & donations.  If you attend Harvard or if you dine there as a visitor, you probably expect more than tacos and fries, and brain food is expensive.  Harvard University Dining Services consists of 13 undergrad dining halls, a kosher kitchen, and 14 retail locations which offer an “unparalleled dining experience.”  And Harvard sports are very popular.  Wealthy Harvard alumni are often happy to pay for season tickets, whatever the price.

Even though nonprofit universities are tax-exempt, they must still pay taxes on any collateral income that is generated — any income that is unrelated to their academic objectives.  According to a recent Bloomberg article, both Cornell and Harvard Universities have been audited by the IRS to make sure they are paying taxes on revenue generated by university bookstores, restaurants, and sports arenas.  Cornell has “passed” its audit, but for Harvard, the jury is still out.



The “Common Cause” Whistleblower Case

You may have heard about the complaint filed by Common Cause against American Legislative Exchange Council (ALEC) asking the IRS to drop the organization’s tax-exempt status for engaging in lobbying activities.  What you may not know is this complaint was filed under the 145-year-old whistleblower provisions now codified in 26 USC 7623.

Has ALEC been exploiting the tax relief available to non-profits?

Common Cause is characterizing ALEC ‘s activities as an improper tax scheme and is asking the IRS to investigate and assess all taxes due.  If taxes are in fact collected from ALEC, it would seem that Dr. Robert W. Edgar, the president and CEO of Common Cause, stands to gain a large sum of money.  One of the requirements under the whistleblower statute is that the complaint be filed by an individual, and it appears to have been filed on behalf of Dr. Edgar.  Under the 2006 amendments to the whistleblower statute, the maximum award is 15% of the taxes and penalties collected (capped at $10 million).

So far ALEC has responded to the allegations by calling them a “harassment tactic.”

“[I]t’s clear to me that this is a tired campaign to abuse the legal system, distort the facts and tarnish the reputation of ideological foes….Without question, Common Cause is a partisan front group masquerading as an ethics watchdog.

~ Alan P. Dye, attorney for ALEC

IRS Drops Investigation of Big-Shot Donors

The IRS had been investigating five unnamed donors who each contributed hundreds of thousands, if not millions of dollars, to certain unnamed 501(c)(4) tax-exempt organizations. The nonprofit organizations then spent this money on political advertising. This occurred during the 2010 elections, and is expected to occur in 2012 as well. The question was whether or not these donors had to pay a 35% gift tax on their donations. But it’s not really a question any longer because the IRS decided not to pursue further examinations.  Why did the IRS drop the investigation? Because they just don’t have any rules/case-law/guidance on this issue.

As part of their statement, the IRS noted that they will “review the need for additional guidance or legislation [and] it is possible that Congress may choose to clearly articulate through legislation the applicability of the gift tax to contributions to 501(c)(4) organizations.”

It was instant tax relief for these donors.  Tax relief, tax avoidance, whatever you want to call itthey didn’t have to pay, and they didn’t have to lift a finger in their defense. Imagine that, 3.8 million words in the tax code and the IRS is still suggesting there isn’t enough.

Said the IRS:

“Questions have been raised regarding the application of gift tax to contributions to I.R.C. § 501 (c)(4) organizations. This is a difficult area with significant legal, administrative, and policy implications with respect to which we have little enforcement history. My office will be coordinating with the Office of Chief Counsel to determine whether there is a need for further guidance in this area.

Until further notice, examination resources should not be expended on this issue. It is anticipated that any future examination activity would be after the coordination described above and would be prospective only after notice to the public. Thus, the Service should not expend examination resources initiating referrals or developing audits. Accordingly, all current examinations relating to the application of gift tax to contributions to I.R.C. § 501(c)(4) organizations should be closed.”

Click here for the official July 7th IRS memo from Steven Miller, Deputy Commissioner for Services and Enforcement.